Notes for DCI banking for the poor

Taken from the book ‘When Helping Hurts‘ by Corbert and Fikkert

Is the micro-fiance model for you?

Many missions, churches, small ministries and individuals in the Developing World pursue the “Provider Model” in which they try to emulate the world famous Grameen Bank of Bangladesh and other Banking for the Poor schemes by setting up a small Micro-finance scheme to provide loans to poor people.

Unfortunately, missions, churches and big-hearted individuals are particularly ill-suited to provide loans for two reasons.

1. They do not have the technical, managerial, and financial resources to get big enough to make their loan program financially sustainable. If borrowers sense that the program is not to be there over the long haul, they stop repaying their loans, thereby causing the program to go broke. To change a city or nation as Grameen has, a viable successful Banking for the Poor scheme needs hundreds, thousands or tens of thousands of clients, a number that is simply beyond the capacity of most missions, churches, agencies and individuals. However individuals and small agencies can undoubtedly change their community as DCI Banking has done in Aduku, Uganda.

2. Christan believers find it very difficult to balance their culture of grace and forgiveness with the discipline needed to enforce loan repayment. How many pastors or bank leaders would be willing to enforce loan repayment – by confiscating security or possessions – from a widow with five children who failed to repay her loan? But if the bank scheme will not enforce loan repayment for this widow, other borrowers will believe that they do not have to repay their loans, and the program will fail. Micro-finance is a tough business as well as a blessing.

Many missionaries and churches ignore this warning and believe that they can successfully pursue the Provider Model. But the landscape is covered with the carcasses of failed loan programs started by well-meaning people.

Doing micro-finance without money from overseas

Consider a Savings and Credit Association instead.

Maria walked to the front of God’s Compassion Church in a Manila slum and testified to the congregation, “My child would have died had it not been for the help of this church’s Savings and Credit Association. I was able to get a loan for the medicine, and they also prayed for me, and visited my sick child.” Camilla then stood up and explained how the SCA members had encouraged her to borrow some money so that she could start a small cookie-selling business. As a result of this business, she has been better able to meet the daily needs of her children.

The Savings and Credit Association (SCA) associated with God’s Compassion Church dispensed a total of forty-one relatively low-interest loans, enjoying a 100 percent repayment rate. Moreover, the interest paid on the loans enabled the SCA members to earn dividends on their savings.

But the blessings were more than economic in nature. The SCA members prayed for each other and their families, and God steadily answered their prayers: husbands found jobs, children were healed, and broken relationships were mended. Neighbors of the SCA members commented about the love and concern that the members showed to one another, so the SCA members invited these neighbors to attend their weekly meetings and Bible study. These non-members were allowed to borrow money from the SCA at an interest rate much lower than that available from local loan sharks. And when the SCA started its second savings and loan cycle, these non-members were allowed to become members.

Quite remarkably, this SCA, which reflects an alternative approach to Micro-Finance did not require one cent of donor money or management by outsiders. A SCA is a very simple credit union in which poor people save and lend their own money to one another. Each member contributes an agreed-upon savings amount to the group’s fund at a weekly meeting. The SCA members decide how much of the group’s fund to lend, to whom it will be lent, and the terms of the loans. At the end of a predetermined length of time, usually six to twelve months, each member’s savings are returned along with dividends they have earned from the interest charged on loans. It is microfinance without outside managers or money!

The only role of the church, mission or outside agencies in this SCA model is simply to facilitate its formation. The SCA group manages its own affairs and handles the money, in other words the poor are empowered to create and manage a system for saving and borrowing the lump sums of money that they need. The group meetings also provide an excellent context for sharing faith and learning God’s ways that may be offered by a mission, a church, or by the group members themselves.

SCA’s have proven to be a highly effective and strategic way forward in the Majority World for the following reasons:

• SCA’s are simple to facilitate, can work on a small scale, and do not require outsiders to lend and collect money.

• In addition to providing loans, SCA’s offer a way for poor people to save and even to earn interest on their savings.

• SCA’s can work in both urban and rural areas.

• Loan sizes in the $5-$12 range are entirely feasible, as are loan sizes amounting to hundreds of dollars; hence, SCA’s can minister to multiple levels of poverty, including the extremly poor.

• Lump sums from SCA’s can be used for the full range of households’ needs, not just financing business investments.

• Because SCA’s were originally developed by poor people, promoting them builds upon local knowledge. This fact, combined with the use of local savings, makes for efficient use of the skill, manpower and intelligence in the community of the poor.

• SCA’s employ highly participatory methods, allowing group members to make their own policies rather than prescribing such policies for them.

• The fact that the SCA’s can originate from churches and missions makes it easy to share faith and teach the faith thereby addressing brokenness at the individual level.

There are numerous examples of individual churches and ministries promoting SCA’s as part of an effective word and deed ministry on a small scale, but large-scale programs are also possible. For example, the Anglican Church of Rwanda is currently trying to include eighty thousand people in church-centered SCA’s as part of its nationwide, holistic outreach.

What are the downsides of SCA’s? Two problems stand out. First, poor people sometimes struggle to manage their groups well, to keep accurate records, and to enforce discipline. Many Micro-Finance Banks perform better in all of these functions. Second, SCA’s do not mobilize large amounts of loan capital as quickly as Micro-Finance Banks do. Group members can grow impatient with  the process of saving money for loan capital, particularly if their businesses can handle larger loan sizes. Nevertheless, the SCA is a viable alternative for addressing the brokenness behind all ranges of poverty in the Developing World.

Consider the savings and credit association affiliated with Jehovah Jireh Church, a congregation located in a slum in Manila, the Philippines. Each of the members of this savings and credit association live on approximately one to five dollars per day. Each member of the association deposits into the group just twenty cents per week, which the association uses to make very small, interest-bearing loans to the members. In addition, each member contributes five cents per week to the association’s emergency fund, which can be used to provide relief to members facing an emergency crisis.

From a Westerner’s perspective, these people are extremely poor. In this light, it is instructive to consider the policies that the savings and credit association developed for its emergency fund. Money from the fund is lent – not given – at a 0 percent interest rate to group members whose family members get sick. No assistance is available for people who have had their electricity or water cut off for not paying their bills.

According to the group, such a situation does not constitute an emergency, since electric and water bills are regular household expenditures for which they should all be prepared. The group will not even give emergency loans for hospitalization for giving birth, because the family had nine months to prepare for the delivery of the baby. Finally, the amount of the loan from the emergency fund is limited to the amount of the savings contributions of the member getting the loan. The members of this savings and credit association are tough people.

Who do you help?

Many of the people coming to you for help will state that they are in a crisis, needing emergency financial help for utility bills, rent, food, or transportation. Is relief the appropriate intervention for such a person? Maybe, but maybe not. There are several things to consider.

First, is there really a crisis at hand? If you fail to provide immediate help, will there really be serious, negative consequences? If not, then relief is not the appropriate intervention, for there is time for the person to take actions on his own behalf.

Second, to what degree was the individual personally responsible for the crisis? Of course, compassion and understanding are in order here, especially when one remembers the systemic factors that can play a role in poverty. But it is still important to consider the person’s own culpability in the situation, as allowing people to feel some of the pain resulting from any irresponsible behavior on their part can be part of the “tough love” needed to facilitate the reconciliation of poverty alleviation. The point is not to punish the person for any mistakes or sins he has committed but to ensure that the appropriate lessons are being learned in the situation.

Third, can the person help himself? If so, then a pure handout is almost never appropriate, as it undermines the person’s capacity to be a steward of his own resources and abilities.

Fourth, to what extent has this person already been receiving relief from you or others in the past? How likely is he to be receiving such help in the future? As special as you bank is, it might not be the first stop on the train! This person may be obtaining “emergency” assistance from one church or bank after another, so that your “just-this-one time gift” might be the tenth such gift the person has recently received.

While many of these rules of thumb strike an intuitive chord when working with the materially poor in North America, many Westerners ignore these principles when working with the materially poor in the Developing World. Compared to the West the levels of poverty in the Developing World seem so devastating, and the people seem so helpless. In such contexts, many Westerners are quick to hand out money and other forms of relief assistance in ways that they would never even consider when ministering to the poor at home.

Great caution required, don’t let your emotions overrule common sense.

Savings

Along with many other people who provide Banking capital we are moving to the idea that the scheme must now involve regular saving by the clients and by the waiting clients before they get their loan.  This means that:

a. Before a client receives a loan they must be registered with the bank and be on the waiting list, and be saving a small amount each month for their own benefit and to prove their reliability and seriousness. Generally, if they save 10 dollars they can borrow at least 90 dollars, or more at the bank’s discretion.

b. Before a Bank can have a capital top up from overseas it must have local savings or investments or gifts coming in. So a Bank that has $50 in savings can ask for a top up of five times that amount, that is $250.

c. DCI will no longer be providing 100% grants of capital as we feel that there must be some participation by the owners of the bank and the poor themselves.

d. The income from local savings should receive a small interest payment and may be used for loans.

Married lady clients

We are advising great caution in making loans to married ladies.  Studies show that in some case loans given to married ladies are immediately transferred to husbands or other male family members without any permission or consultation. The ladies are then sometimes left to make the repayments yet have no new income meanwhile the husband enjoys the new prosperity but may not share it. Complaints by the married ladies have led to cases of violence against them so in these cases micro-finance has not helped them, rather it has harmed them and made life more difficult.

DCI thinks that preference should be given first to widows, then to single women, abandoned women and orphans before male clients or married ladies.

In the case of an application from a married woman then the husband must also be interviewed and motives brought into the light, he must become a co-borrower along with the wife and be held equally responsible for the repayments.

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